Wednesday, May 27, 2015

Though the Hong Kong and Singapore stock markets are diverging from the US stock market, it is still worthwhile to pay attention to the words of US Federal Reserve chairwoman Janet Yellen. Yellen, who previously hardly commented on the stock market, recently said that Wall Street is overvalued.

I think the main reason for the comment is to cool down the US stock market before interest rates are raised, so as to lessen the anticipated blow to the US stock market, which in turn will limit the negative impact on the nation’s overall economic performance.

Interest Rate Hikes

The Fed started talking about rate hikes in May 2013, and that went on for two years. While the Fed has been all talk no action, the materialisation of the rate hike event will still bring damage.

The Dow Jones Industrial Average has been vacillating within a relatively narrow band for a while, so it has little effect on the stock markets in Singapore and Hong Kong.

However, once the fluctuations break out from this band, the resulting swings can still impact stock markets worldwide, so we should remain vigilant and take Yellen’s speeches to heart from now on.

Over the past few weeks, the Singapore stock market has been correcting downwards, while the Hong Kong stock market has also been going through a correction.

Small & Mid Caps Booming Lately

Nevertheless, when we talk about a rise or correction, we have always been referring to the movements in blue-chip stocks. In recent months, small-, mid-cap and Growth Enterprise Market (GEM) stocks in Hong Kong have been enjoying a booming rally, thanks to the expectant speculations over the Shenzhen-Hong Kong Stock Connect scheme that is being mooted.

Currently, investors from mainland China are not allowed to trade in Hong Kong small-, mid-cap and GEM stocks through the Shanghai-Hong Kong Stock Connect, and are limited only to first-tier blue chips and second-tier large-cap stocks.

Retail investors form the bulk of Chinese investors, and they are obsessed with GEM stocks. GEM stocks are also listed on the Shenzhen bourse, so if the proposed connect scheme eventually allows bilateral trading of GEM stocks, this group of Hong Kong stocks are primed for a bull run.

The average price-to-earnings ratio of Shenzhen GEM stocks is currently in excess of 100 times, an unbelievable level. The allure of the proposed Shenzhen-Hong Kong Stock Connect lies in the fact that Hong Kong does not impose circuit breakers, so stock prices are allowed to rise 50 percent, 60 percent or even more.

In Chinese stock markets, if share price rise or fall by 10 percent, trade is immediately halted for the stock. For this reason, the Hong Kong bourse offers better speculative opportunities.

Chinese Stocks Will Reflect True Value Soon

As Chinese housewives are queuing up in droves to open trading accounts, at least half of the hundreds of millions of Chinese investors are stock market novices.

Majority of Chinese investors believe that stock prices will rise and that the Chinese central government would want the stock market to rise. As stock prices rise, they attract even more new investors.

The recent rebound in Chinese property stocks is supported by solid company performance across the board, attributable to the Chinese government’s effort in supporting property prices in hope that it will help propel growth in the economy. Chinese property stocks have fallen so much over the past two years, and it is time for them to appreciate so as to reflect their true value.

Stocks In HK Attractive

The blue-chip property stocks in Hong Kong are integrated corporations, rather than pure property plays. These stocks are usually the flagship shares of some tycoons, with many other businesses bundled together, on top of the property business.

When CK Hutchison Holdings (0001) eventually spins off its property business as a separately listed entity, Cheung Kong Property Holdings, it will become Hong Kong’s first pure blue-chip property stock.

Some time back, I believed that Li Ka-shing’s spin-off move to separately list Cheung Kong Property reflected his pessimism about the property sector in Hong Kong and mainland China.

However, with the recent bottoming out and rebound in the Chinese property market, and as Hong Kong property prices remain elevated, I have changed my view.

The asset value per share of Cheung Kong Property is higher than expected, and this is a strong support for the prices of CK Hutchison and Hutchison Whampoa (0013).

I believe after Cheung Kong Property is officially listed, Cheung Kong Infrastructure Holdings (1038) and Power Assets Holdings (0006) will be next in line to be restructured, bringing tremendous benefits to all shareholders.

Lately, there has been a spate of Hong Kong stocks undergoing share placements after a rally, putting pressure on investors. In particular, if the stock price discount is high, it will cause share prices to plunge to levels near the subscription price after the exercise.

Such situations are common and unavoidable in a bull market, and are hard anticipate, so investors should avoid chasing after stocks already on the rise.

From another perspective, we may wish to secure those shares that have yet to undergo placement, and wait for their share prices to be pumped up before the exercise.

Stocks To Climb Soon

In general, share prices will be pushed higher before placement. Otherwise, it will not benefit the major shareholders, because that will be akin to selling new shares at a low price, and diluting major shareholders’ profit.

Currently, listed companies most in need of funds are none other than Chinese property stocks. A year ago, the media was already reporting that China’s property firms were issuing high yield bonds.

Why bonds rather than a share placement? Share prices of mainland China property companies were in the doldrums then, and a share placement would be equivalent to making major shareholders sell their assets at a low price. That is why companies would rather elect to conduct rights issue than shares placement to raise funds.

The worse can be considered to be over for Chinese property stocks, and stock prices are starting to recover. Although it is still far from booming, there is a possibility for prices to be pushed up before ending with a round of share placement.